DEFICIT POSES GREATEST CHALLENGE

It is becoming increasingly clear that the rise in the U.S. trade deficit over the past five years poses one of our country's greatest challenges.

Estimates are that this year's deficit will reach a staggering $170 billion, up from $148 billion in 1985. You don't have to be an economist to conclude that this won't go on forever. Somewhere out there is a day of reckoning.In recent months the talk from Washington has been that we may have finally turned the corner on the deficit.

The Reagan administration's reduction of the value of the dollar vis-a-vis the currencies of major trading partners such as Japan and West Germany has been a centerpiece of U.S. strategy. That along with jaw-boning Japan into buying more U.S. goods. Unfortunately, not much evidence of progress is to be seen in the U.S. Commerce Department's trade statistics for the past four months.

In 1985, the July-October deficit was $51.3 billion. For the same period this year, it totals $56.7 billion, an increase of 10.5 percent.

These figures may come as a surprise to some who have read the recent headlines indicating hard statistical evidence of a turnaround.

The problem is that the preliminary Commerce Department figures are just that, preliminary. For example, the August trade deficit was originally reported at $13.3 billion. A month later it was revised upward to $14 billion.

On the eve of the congressional elections, the preliminary September deficit was reported at $12.5 billion compared with $15.8 billion a year ago. This was cause for considerable elation among administration circles.

U.S. Trade Representative Clayton Yeutter saw the figures as a hopeful sign that the Reagan administration's policies were beginning to work.

Alas, the revised September figure was $2.2 billion higher than first reported coming in at $14.7 billion.

Before you jump to the conclusion that the September numbers were ''massaged" for "electorial" purposes, you should know that the Commerce Department misses in both directions.

For example, the July deficit was originally reported at $16 billion but later revised downward to $16 billion.

It will be interesting to see what happens to the preliminary October deficit figure of $12 billion. If it does not get revised upward when the preliminary November figures are announced later in December, perhaps we really are turning the corner.

Even so, the degree to which the deficit is expected to be reduced in 1987 is really rather modest. The forecasts I've seen indicate the deficit will run in the range of $140 to $150 billion, down $20 to $30 billion. Some economists are even less optimistic.

I'm convinced that if the deficit is to be significantly reduced, we must do a lot more in this country than we have done to date.

Currently, our huge federal deficit is being financed to a significant degree from abroad. Japan, for example, which this year is expected to run at least a $60 billion trade surplus with the United States, has been pumping much of that money back into the United States in the form of government debt instruments, the attraction being higher U.S. interest rates.

If we cut our trade deficit with Japan, as we must, we run the risk of losing the funds we've been getting to finance the budget deficit. That makes cutting the federal deficit absolutely crucial, hopefully in lockstep with reductions in the trade deficit.

Throughout the decade of the 1980s, this country has been spending more than it makes. We are now the world's largest debtor nation, owing an estimated $200 to $250 billion on a net account basik worldwide. That's more than all of the Central and South American republics combined.

Something has got to be done if we are to avoid further losses in living standards. Over the next few weeks, I'll be writing on some action steps we can take now to improve both the trade and budget deficits. Lots of Americans are beginning to talk about the trade deficit. But the time has come to do more than talk.

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